Greetings, and welcome to the Aris Water Solutions Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Tuerff, Senior Vice President, Finance and Investor Relations.

Good morning, and welcome to the Aris Water Solutions second quarter 2022 earnings conference call. I am joined today by our President and CEO, Amanda Brock, our Founder and Executive Chairman, Bill Zartler; and our CFO, Brenda Schroer. Before we begin, I'd like to remind you that in this call and the related presentation, we will make forward-looking statements regarding our current beliefs, plans and expectations, which are not guarantees of future performance and are subject to a number of known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from results and events contemplated by such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements. Please refer to the risk factors and the other cautionary statements included in our most recent quarterly report on Form 10-Q and annual report on Form 10-K filed with the Securities and Exchange Commission. I would also like to point out that our investor presentation and today's conference call will contain a discussion of non-GAAP financial measures, which we believe are useful in evaluating our performance. These supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with U.S. GAAP. A reconciliation to the most directly comparable GAAP measures is included in our earnings release and the appendix of today's accompanying presentation. I'll now turn the call over to our Founder and Executive Chairman, Bill Zartler.

Thank you, David, and thanks, everyone, for joining us this morning. In the second quarter, we had momentum and growth in a supportive commodity price environment, but we were impacted by headwinds and supply chain constraints leading to higher-than-anticipated cost inflation and unexpected delays from our contracted customers late in the quarter. With the newer completion design of multi-well, long lateral pads and large water societies, delays can have a significant impact on us across the end of the quarter. As a result, our adjusted EBITDA for the second quarter fell slightly below our expected range of $38 million to $40 million. Our long-term contracts demonstrated reliability and leading recycling capabilities, which continue to drive our growth alongside our premier customer base. As delays in wells are completed, we expect to both deliver recycled water for those wells and receive the associated produced water volumes back. Similarly, our CPI-linked revenue inflation costs in our contracts are triggered at discrete, generally annual times, resulting in short-term mismatches. Fundamentally, we continue to grow substantially year-over-year and have confidence in this continued growth. Yesterday, we also announced the acquisition of the Delaware Energy Services Assets in exchange for equity consideration and a small volumetric-based earn-out. I'll let Amanda expand on the strategic benefits of the transaction, but we're pleased to add Delaware Energy's complementary assets and customers to our core system in Eddy and Lea Counties. With that, I'll turn it over to Amanda.

Thank you, Bill. In the second quarter, we increased our total water volume to approximately 1.2 million barrels per day, up 34% versus the second quarter of last year and up 6% sequentially over the first quarter of this year. As Bill referenced, later in the second quarter, a few of our large contracted customers experienced delays and provided schedules for completions on our dedicated acreage, which in turn delayed anticipated water solution volumes and related revenue. Our adjusted operating margin per barrel was $0.41 a barrel in the second quarter of 2022, down $0.01 a barrel compared to the second quarter of last year. We have seen cost pressures continue to increase, particularly related to labor and commodity-linked costs such as chemical treatment expenses. We continue to focus on identifying and implementing operating efficiencies, such as enhancing automation to better manage costs and margins during this inflationary environment. Our contractual revenue increases with CPI-linked escalators at annual reset dates, which will help offset pressure on our margins over time. We continue to look for attractive opportunities to add capabilities and scale to our infrastructure network. And today, we are very pleased to announce the closing of the acquisition of Delaware Energy Services Assets. The Delaware Energy Assets add 7 water handling facilities and associated gathering lines in our core area of Eddy and Lea Counties in New Mexico. This is a great opportunity to add assets to our network for several reasons. First, the Delaware Energy Assets are located at key transport infrastructure and can be efficiently integrated into our network with minimal construction risk. Second, by adding additional handling capacity in New Mexico, we can recycle more locations for a greater number of customers. Third, we're supplementing our operational capabilities close to existing and new customers, which we expect to generate additional commercial opportunities. We expect the Delaware Energy Assets to add an incremental $11 million to $13 million in adjusted EBITDA in 2023 once fully integrated and to also defray some additional future capital expenditures in our core operating areas. On beneficial reuse, we continue to make progress piloting and identifying relevant technology for the treatment of produced water for non-consumptive agriculture, industrial uses and potential supplemental water. We are completing several beneficial reuse projects and working alongside regulators, development partners, and other industry participants to evaluate and scale promising technologies. We will have additional progress to share on these initiatives and partnerships shortly as we focus on driving innovation in sustainable water management and maximizing opportunities for the use of produced water. With that, I'll turn it over to Brenda to discuss the financial results for the quarter.

Thanks, Amanda. We reported adjusted EBITDA for the second quarter of $37.2 million, up 21% from the second quarter of 2021 and up 3% sequentially from the first quarter of 2022. As Bill and Amanda referenced, due to volume delays and inflationary pressure, our adjusted EBITDA was slightly below our previously provided guidance range of $38 million to $40 million for the quarter. Based on customer-provided updated schedules, we have re-forecast our third and fourth quarter 2022 volume expectations. Given these updated volumes, along with inflationary pressures that will impact operating margins in the short term, we anticipate third quarter adjusted EBITDA will be between $38 million and $41 million. At this time, we believe the fourth quarter of 2022 adjusted EBITDA will grow 5% to 10% sequentially from our third quarter estimated EBITDA. Our capital expenditures were approximately $39 million for the second quarter of 2022 and approximately $48 million year-to-date. We're investing in the second half of 2022 to support further growth in 2023 and beyond for Chevron and other contracted customers. We expect capital expenditures to be back half-weighted in 2022 as we can start additional infrastructure consistent with our previously provided full-year outlook of $140 million to $150 million. We continue to see attractive returns in growing our infrastructure and our capabilities, while maintaining a conservative balance sheet at the low end of our long-term leverage target with ample liquidity. We ended the second quarter with approximately $35 million in cash and an undrawn and available $200 million revolving credit facility for total available liquidity of approximately $235 million. As Bill and Amanda have mentioned, we closed on the acquisition of Delaware Energy's asset on Monday, August 1, with an issuance of approximately 3.37 million shares that will be reflected in our third quarter financial statements. We will continue to evaluate acquisitions for strategic infrastructure to support incremental growth. Additionally, yesterday, we announced our third quarter 2022 dividend of $0.09 per share, continuing our commitment to returning cash to shareholders while maintaining flexibility to fund additional growth opportunities. With that, I'll turn it back to Amanda to wrap up.

Thanks, Brenda. As we think about the company's performance more broadly, we are delivering sequential volume growth of over 6% in the second quarter and anticipate growing adjusted EBITDA by approximately 30% this year versus 2021. Our customers are clearly committed to developing the deep inventory of assets on our long-term contracted acreage, which is dedicated to us on average for the next 9 years in the core of the Northern Delaware Basin. Executing on opportunities such as the Delaware Energy acquisition this quarter, and a significantly expanded long-term Chevron agreement last quarter, is indicative of our focus on delivering efficient growth. Our core operations and business development opportunities remain strong, and we believe we will continue our rapid growth well into the future. With that, we will take questions.

Thank you. Our first question comes from Samantha Hoh with Evercore ISI. Please proceed.

Hey, guys. Thanks for taking my question. I have a question, I guess, just on the margin front. Do you think that you'll be able to recoup some of the decline that you saw in 1Q for just the higher cost that you incurred? Just kind of curious if some of those cost escalators kick in so that we could see a flat margin or is it going to be down potentially?

Samantha, thanks for that question. Yeah, we do see us recouping some of that margin. As you know, we've got CPI in our contracts. And those usually reset in January, March, and also in June, particularly with one of our large contracts. So with inflation being where it is, we have sort of the ability from our contracts to really keep up. But as we focus on efficiency and as time goes forward, and if we see inflation lowering, we do see those margins being recouped.

Okay, excellent. And I'm just kind of wondering, as we sit here at the start of August, are you guys anticipating any sort of slowdown for the end of the summer or maybe at the end of the year for the holidays?

We've spent a lot of time, Sam, talking to our large contracted customers about their plans, working with them on their forecasts. At this time, we do not anticipate a slowdown sort of at year-end, everybody is still moving forward. Clearly, because of the slowdown and delays we saw here at the end of June in the frac schedule, which has had the impact on us here in Q2, it is difficult with tightness in the market for them to sort of catch up. So we will see the delays we experienced now continue through the year. We expect to fully catch up next year. But we've got capacity utilized that we see ourselves with a binding opportunity to utilize the capacity we've got. So as a consequence, asking that question about slowdown, we think there's an opportunity as a result of catching up to get to the low end of our guidance range. But we currently do not see additional new delays at this time that we have been told about.

Okay, great. And then just one last one, if I can squeeze one in, is just about the beneficial reuse of produced water. I'm curious which projects you're most excited about. There's a lot of really interesting opportunities, and it definitely makes a lot of sense from the environmental angle. So I was just kind of curious, which projects do you think are more likely to move forward and fastest? And which ones get you the most excited?

We're pretty excited about a number of the projects that we've got going on. We have completed our first project with Texas A&M as it related to growing cotton and switch crops, which was very successful. We are looking at that as a major issue. The project that we're most excited about is working on a larger scale with two of our large operators, which we'll talk about later, where we will be able to identify technologies to really treat water for not only consumptive agriculture but also for industrial uses and for environmental uses, and to discharge the water back into the environment as they do potentially in other states. So we have a lot of projects that we are working on right now, but I think we're further along in the non-consumptive agriculture area.

We look forward to hearing about all these projects. Thank you.

Thank you.

Our next question comes from the line of Don Crist with Johnson Rice. Please proceed.

Good morning, everybody. How are you all this morning?

Great.

Thank you.

I wanted to talk about the Delaware Energy acquisition. In looking at their website, and on slide 7 of the new presentation, it looks like, number one, they were trucking a lot of water. And number two, that you have a lot of right-of-ways close to their disposal wells. I wanted to ask kind of a two-part question. Number one, what would the CapEx be to fully integrate the seven disposal wells into your system? And number two, how much of an impact will that be on next year's CapEx? Is it a significant impact to next year's CapEx, like a reduction in CapEx for next year versus your original plans?

Don, we do see a definite CapEx reduction next year as a consequence of this acquisition. We have right-of-way and are connected already to some of these wells, so we do not see significant additional costs needed to connect our system to the wells that we are going to integrate. There are certain wells we have acquired that we do not anticipate bringing into the larger system at this time that are connected to existing and potential new customers. From a capital perspective, this is a positive story. We're very excited about this acquisition. It gives us great optionality and it gives us an opportunity this year to accelerate some of the initiatives we're looking at with our customers. As we indicated in our deck, once integrated, we expect this acquisition to generate incremental annual adjusted EBITDA of $11 million to $13 million. But there is a great capacity to utilize the asset, depending on our business development opportunities that could be higher.

I think you have to look at next year in two different ways. The EBITDA we're forecasting doesn't utilize all the capacity. We're using that capacity to defray additional capital that we planned on spending next year. If you were to fill up those assets, you're talking EBITDA in the $19 million to $20 million range all in. So you can look at it in a couple of different buckets. We're focused on the EBITDA that will be incrementally added, what it brings in, and then the capital defrayal of approximately $20 million to $25 million next year.

Yeah, it looks like a very attractive acquisition to me. I wanted to pivot to the delays from your customers. Have those delays been alleviated now? So basically, you just cut - you guys pushed one quarter to the right from those volumes coming in. And is that kind of done? Was it a one-off thing, like a frac crew had an issue and missed a month or something like that? Any color you can provide there would be helpful?

The specific delays that we saw in late June have already been addressed. Those jobs are working today. So it is a pushback. Now, you don’t really catch up for a while because you're still very tight frac capacity. To catch up, you either need to go off faster than planned or you need to add a frac crew. We're not seeing incremental additions today in that area, but we are seeing that volume catch up. So it's a bit of push to the right rather than anything else into next year, where we hope that you're freed up on two additional frac capacities to catch up.

Okay. So the issues are alleviated. So it's just a…

And we gave at that time…

But just to put it in perspective, a 4-well pad today within the lateral is going to take 2 million barrels of water and 2 million barrels of water at a $0.40 margin results in $800,000 in gross profit spread across the quarter. The numbers add up very quickly, and if you have a couple of those happen in the quarter, it's a significant impact. We see them all catching up today, and we see the sand challenges going away. We see the basic frac challenges slowly resolving themselves as the market gets caught up and becomes more efficient.

These delays that occurred and impacted the quarter happened in the last week of June. So as Bill just explained, if you have one 4-well pad pushed out, it has a real impact. You catch up, but it's very lumpy quarter-over-quarter, and we didn't have a lot of advanced notice on this as it happened in the field. This is a consequence of managing crew performance, supply chain, etc.

I appreciate that color. And just one more, if I could squeeze it in. On the cost side, I don't know if it was labor that necessarily hit you or other supply chain. But has that kind of stabilized now? Or do you think that you're going to see more impacts going forward into the back half of the year?

We certainly saw some impact on labor, which we've taken steps to alleviate. We also saw a big impact in chemicals and the cost of chemicals. So focusing on both supply chain issues with chemicals and increasing automation, we are reacting to costs, and we are looking at ways to bring in additional automation to manage costs better.

Thanks, Don.

And our next question comes from John Mackay with Goldman Sachs. Please proceed.

Hi, everyone. Good morning, and thanks for the time. I wanted to follow up again on the OpEx side. Can you - we talked a little bit about this last year, but maybe you can just go into a little more detail on the focus on costs. Can you just talk about the difference in margin between being able to recycle a barrel versus needing to send a barrel down hole? Just reiterate if recycling is a lot higher margin. Does that still hold given the changes with chemical prices, etc.?

There is a bit more chemical use than we had going down hole to recycle, so there's some of that. But you avoid the down hole royalty, which offsets a little bit of that. The chemical cost really went up on a per-barrel basis, and we see that offsetting with the additional costs. There are also some H2S challenges in Lea County that additionally drive some of our chemical costs up, and we're working with our customers to alleviate ahead of our systems.

Also, John, when we recycle, obviously, we don't go down hole, and you know the power components were going down hole. We've seen, particularly in New Mexico, which accounts for about 50% of our power load, an increase in rates. So there are some increases in power costs. But generally, what we've explained before about the savings when we recycle and don't go down hole are still correct.

Okay, that's great. Thanks for that. Maybe I'll take another one, just at a higher level. If we bake in everything at the acquisition you guys announced today, we think about the big Chevron contract from a couple of months ago. Can you just talk a little high level on how you're thinking about overall EBITDA growth kind of next year over this year and maybe even looking to 2024? Not necessarily talking specifics, but just how we can think about you guys versus an overall basin perspective?

If we look at 2023, obviously, we're not ready to give guidance on that. But we remain very optimistic about growth into 2023. We see that ramp in growth and rig counts following with the new Chevron contract you referenced and also with the business development activity levels of our customers. We see the sequential year-over-year growth. And if we look at 2022, we still got EBITDA growth in 2022, as we explained, almost 30% with opportunities to do even better. So we continue to see that sequential growth. I mean, we feel very optimistic about the core business and remain very focused on executing and continuing to achieve that growth. Bill, do you want to add anything?

Yeah, all said.

Got it. That's great. Appreciate your time today. Thank you.

Thanks, John.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back to Amanda Brock for any closing remarks.

Thank you. And thank you, everybody, for your questions. So despite the headwinds and the delays we discussed, we remain very confident in our core business and this continued growth. We are optimistic about the opportunities ahead. We remain very focused on executing and managing costs. We look forward to coming back with improvements. Thank you to our customers, to our employees, to all of our stakeholders, and have a great day, everybody.

Thank you. This concludes today’s conference. Thank you for your participation. You may now disconnect.